2024 – PROBLEM 6 16 Second Stage Allocation and Product Margins LO 6 4 LO

PROBLEM 6-16 Second – Stage Allocation and Product Margins (LO 6-4, LO 6-5)

 

AnimPix, Inc. is a small company that creates computer-generated animation for films and television. Much of the company’s work consists of short commercials for television, but the company The young founders of the company have become increasingly concerned with the economics of the business-particularly because many competitors have sprung up recently in the local area.
To help understand the company’s cost-structure, an activity-based costing system has been designed.
Three major activities carried out in the company; animation concept, animation production, and contract administration. The animation concept activity is carried out at the contract proposal stage when the company bids on projects. This is an intensive activity that involves individuals from all parts of the company bids on the projects. This is an intensive activity that involves individuals from all parts of the company in creating storyboards and prototype stills to be shown to the prospective client. After the client
has accepted a project, the animation goes into production and contract administration begins.
Technical staff do almost all the work involved in animation production, whereas the administrative staff is largely responsible for contract administration. The activity cost pools and their activity measure and rates are listed below:
Activity Cost Pool                                Activity Measure                     Activity Rate
Animation concept………………… Number of proposals                  $ 6, 000 per proposal
Animation production……………. Minutes of animation                   $ 7, 700 per minute of animation
Contract administration………… Number of contracts                                   $ 6, 600 per contract

 

These activity rates include all of the costs of the company, except for the costs of idle capacity and re-organization-sustaining costs. There are no direct labor or indirect materials costs.
Preliminary analysis using these activity rates has indicated that the local commercials segment of the market maybe unprofitable. This segment is higly competitive.

Producers of local commercials may ask several companies like Anim Pix to bid which results in an unusually low ratio of accepted contracts to bids.
Furthermore, the animation sequences tend to be much shorter for local commercials than for other work. Because animation work is billed at standard rates according to the running time of the completed animation, the revenues from these short projects tend to be below average. Data concerning activity in the local commercials market appear below:
Local
Activity Measure
Commercials
Number of proposals ……………………..20
Minutes of animation …………………….12
Number of contracts ………………………8
The total sales for local commercials amounted to $240,000.
REQUIRED:
1. Determined the cost of serving the local commercial market.
2. Prepare a report showing the margin earned serving the local commercial market.
(Remember, this company has no direct materials or direct labor costs.)
3. What would you recommend to management concerning the local commercial market?